Is the Telstra (ASX:TLS) share price a dividend trap?

It’s been a tough time of late for shareholders in Telstra Corporation Ltd (ASX:TLS) with the share price sinking to fresh lows and the company announcing on Monday that its full-year earnings would be at the lower end of previous guidance. The stock is still on a pretty good dividend yield of 7.6%, ahead of the major banks with National Australia Bank Ltd. (ASX: NAB) on 7.1%, Westpac Banking Corp (ASX:WBC) on 6.2%, Commonwealth Bank of Australia (CBA) on 6% and Australia and New Zealand Banking Group (ASX: ANZ) on 5.8%. But anyone holding the stock for income…

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It’s been a tough time of late for shareholders in Telstra Corporation Ltd(ASX:TLS) with the share price sinking to fresh lows and the company announcing on Monday that its full-year earnings would be at the lower end of previous guidance.

The stock is still on a pretty good dividend yield of 7.6%, ahead of the major banks with National Australia Bank Ltd.(ASX: NAB) on 7.1%, Westpac Banking Corp(ASX:WBC) on 6.2%, Commonwealth Bank of Australia (CBA) on 6% and Australia and New Zealand Banking Group(ASX: ANZ) on 5.8%.

But anyone holding the stock for income may want to reconsider Telstra as a long-term dividend play.

Telstra’s downgrade to its earnings guidance highlights the acceleration of the company’s earnings decline and possibly risks a cut to the dividend, despite Telstra remaining committed to a 22 cent total dividend payment for now.

On Monday, the company said full-year EBITDA is now expected to come in at the bottom end of a previously stated $10.1 billion to $10.6 billion range.

Citigroup is one broker saying that the telco needs to “take quick drastic action in order to slow the earnings decline and minimize the next dividend cut.”

“The acceleration in the core business decline means that we no longer believe Telstra can generate sufficient earnings to maintain a 22c dividend in both FY19 & FY20 without breaching the upper limits of the payout ratios in its capital management framework,” the broker said in a report.

“In our view it no longer makes sense to pay 22c beyond FY18 when the ordinary dividend is likely to fall to 11c once the one-off payments end.”

Citigroup also said that it saw limited scope for revenue growth in Telstra’s core businesses and the company should instead consider more aggressive cost cutting and could consider more drastic actions including asset sales, tower sharing agreements and even providing competitors with access to core infrastructure in order to boost wholesale revenues.

The broker cut its core EPS forecasts by 5%-15%, reported EPS were cut by 5%-6%, and target price to $2.70 from $3.10. It has a “Sell” rating on Telstra.

Macquarie is another broker that also doesn’t have confidence in the telco’s 22 cent dividend level.

It said the earnings downgrade highlighted the competitive pressures and boded poorly for Telstra’s FY2019 outlook, with the broker cutting its forecast FY2019 dividend to 20 cents per share.

“While Telstra could use NBN one-off payments to sustain the current 22cps level for the next few years under its current policy, we think the increasing pressures on the business introduce scope for a more conservative view being taken on the long-term dividend outlook,” the broker said in a report.

Macquarie also downgraded near-term EPS estimates by 7% to 10% due to ongoing competitive pressures, deteriorating operating trends and an acceleration in NBN activations pressuring earnings.

It also cut its target price by 9.9% to $3.20. It has a “Neutral” rating on Telstra.

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

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Motley Fool contributor Gabriella Hold has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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